Modern Monetary Theory Makes Sense

 I submitted this to the Raleigh News & Observer on April 7. It didn't sell.
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On March 31 The N&O published a New York Times OpEd by Robert Shiller titled “Modern Monetary Theory Makes Sense, Up to a Point.” Shiller like many of his mainstream colleagues, which include Krugman, Summers, Rogoff and others, doesn’t quite get the essence of MMT. They all agree that it is OK for government to run fiscal deficits sometimes, but maybe not too much. How much would appear to be anyone’s guess.

MMT is to mainstream economics what Copernican planetary theory was to the prior Ptolemaic view. It’s no wonder MMT is attacked without being understood. MMT gives us an entirely new perspective on our economy.
MMT focuses on achieving full employment, while the mainstream focuses on reducing federal deficits, which are government spending in excess of taxes.

MMT explains that deficits are normal and necessary for a rich country like ours. Moreover, it tells us how large the deficits should be. Deficits need to be large enough to achieve full employment for anyone willing and able to work. Mainstream economists obsess about achieving balanced federal budgets at least in the long term.

National Debt is equivalent to Private Sector savings. Your family share is what you own.

Mainstream economists preach that taxes and borrowing fund government expenditure. MMT teaches that the government must spend before there is money to be taxed and borrowed.

Mainstream compares government finances to those of a household or business. It also insists that when government competes for a limited supply of money private investment will be “crowded out.” MMT shows us that the federal government can purchase goods and services limited only by available resources. Government competes with business for those productive resources not for money.

The mainstream does not tell us how the money supply comes into being. It just exists in limited quantity as a veil behind which things happen. MMT explains that money is created by both federal deficits and bank loans and that the money supply expands and contracts depending on demand.

Further, MMT correctly regards the Federal Reserve Bank (Fed) as the monopoly issuer of US dollars. It sets the price of money, the Federal Funds Rate, and supplies all that the economy demands at that rate.

Under current monetary principles the Fed manages inflation by the morally indefensible practice of limiting employment opportunities for workers as it raises interest rates based on unemployment statistics. It tries to force 3% to 5% unemployment or some 4,500,000 to 7,500,000 people to maintain a pool of unemployed workers. That keeps wages low.

MMT employs taxes and borrowing as tools to manage inflation. Also, MMT seeks to achieve full employment through a Job Guarantee that maintains a pool of federal workers (managed at local levels) employed at a livable minimum wage. Businesses can draw upon this pool, if they meet the minimum standards set by the Job Guarantee. This practice would enforce a minimum wage and eliminate parasitic employers (those relying on food stamps to supplement wages).

We need only look at history to recognize the value of federal deficits. Our nation has been running deficits for over 200 years. In that history government has run a significant surplus seven times. And each time the surplus was followed by a terrible depression or recession. Most recently were the surpluses run by president Jackson (1835), who was widely acclaimed for paying off the national debt. Then came the surpluses before the Great Depression, followed by those run by president Clinton, who is also widely praised. During the decade leading to 2008 federal surpluses and low deficits, drained financial resources from the private domestic sector, which led to the Great Financial Crisis.

MMT urges the country to expand its productive output to the maximum and provide all residents with a decent living standard. Ambitious programs like the Green New Deal, universal health care, investment in education and infrastructure are well within our capabilities. It’s not about our nation living within its means, but up to its means. That is making America great.

In Defense of MMT

This is a response to a George-Will article published in the Albuquerque Journal. For the fun of it I submitted it to the Journal last week. It is an update and revision of the letter I previously submitted to the Raleigh News & Observer. Gotta keep trying.
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George Will, a great wordsmith, sells newspapers. But, his column in the Journal on March 14, which dismisses MMT (Modern Monetary Theory) as a late-night commercial hoax, exposes his economic naiveté. Will and the economists he quotes, Summers and Furman, are members of an old-boys club, which includes Paul Krugman. That self aggrandizing club has been slow to grasp the essence of MMT.

MMT represents an economic model to replace the so-called Neoliberal model that over the past half century has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its adherents’ inexorable influence on our Congress, it extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out well anywhere!

Results of neoliberal policies

MMT recognizes the power of a state issued, sovereign, fiat currency. Federal spending creates money in the economy while taxes, in effect, destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by government deficit spending since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard when President Nixon took us off the international gold standard in 1971.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. The purchase of more goods and services than the nation can produce will cause inflation.

Implied in the above is the counterintuitive fact that government, again unlike households and businesses, does not need to tax or borrow to spend. Taxes and borrowing, the sale of treasuries, are useful to avert inflation.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, published Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT. He would balance the economy not the budget.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a major proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research. That research is published and available to those willing to learn.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a Green New Deal, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. Don’t be persuaded by the knee-jerk reactions from the old-boys club.

AOC is right about a Green New Deal

Today I submitted the following to the Raleigh News & Observer. It felt good to write something again.
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Alexandra Ocasio-Cortez is well known and both maligned and praised around the world as is her signature, audacious proposal for a GND. When asked recently on a TV program how she would “pay for” such an ambitious program, she answered with aplomb, “The same way we pay for our military.” To paraphrase, the government writes a check and government checks don’t bounce.

She has learned about Modern Monetary Theory (MMT), a description of the way our economy works that is gaining widespread traction with economists. MMT is also both maligned and praised around the world. It represents an economic model to replace the so-called Neoliberal model that over the past fifty years has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its unconscionable influence on our Congress extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out!

https://www.youtube.com/watch?v=_HKhP0nzaAM

MMT recognizes the power of a state issued, sovereign, fiat currency. That federal spending creates money in the economy and taxes in effect destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by the government for public use since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard long ago.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. Attempts to buy more goods and services than the nation can produce will cause inflation.

Implied in the above is the counter intuitive fact that government, again unlike households and businesses, does not need to tax or borrow in to spend. Taxes and borrowing, the sale of treasuries, have other purposes beyond the scope of this note.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, gave a paper entitled, Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a GND, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. AOC is on firm ground.

A Choice: Fed Interest Rate Hikes or a Job Guarantee

The JG is getting a lot of press. This is an attempt to call attention to it. I submitted it to the News & Observer but they didn't bite. Perhaps I pack to much information in it. An article could be written on almost any paragraph.

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Political discussions are sizzling as politicians listen to academics touting the advantages of a federal Job Guarantee to target full employment.

For decades the Fed has raised interest rates to fight inflation. After all, the Fed’s mandate is to maximize employment and achieve price stability. So, when the Fed thinks inflation is lurking, it raises interest rates to slow economic growth. Its rationale is based on the out-dated Phillips curve that indicates inflation increases as unemployment decreases. Accordingly, the obvious solution to rising inflation would be to increase unemployment. 

Conventional economists seek the elusive NAIRU (Non-Accelerating Interest Rate of Unemployment). It sounds spooky and is spooky. It posits that there must be some level of unemployment at which prices are stable. The Fed seeks that level through adjustment of interest rates.

That’s right! The goal of the Fed is to reduce job opportunities in order to control prices and maintain the value of the dollar. In doing so, it ignores the tremendous costs of unemployment. Not only does an idle worker contribute nothing to GDP, unemployment payments rise, and the sociological costs are huge. Adding to the misery, the victims of enforced unemployment are often looked upon with scorn.

In the end, the Fed’s action is counterproductive. Increased interest rates raise the price of everything, which is the very definition of inflation. And, through the resulting increased rents people pay, it provides more opportunities for the rich to disadvantage the less fortunate. It is a national policy that most conventional economists support. But it just doesn’t work.

Fortunately, there is an alternative. Marriner Eccles, FDR’s Chairman of the Fed understood it. We named the Fed building in Washington after him and forgot that he knew our great nation has the productive capacity and ingenuity to provide a decent living for everyone. 

During Eccles’ tenure the WPA (Work Progress Administration) thrived and offered jobs to the able and willing. In the 1990s, Warren Mosler, a hedge fund manager, reawakened economists to Eccles’ insights.

Academic authors see the JG as a federally funded, locally administrated program to hire any willing and able worker at a living wage with benefits. The range of possible jobs would have few limits and could include filling potholes to replacing water and sewage systems. And from directing traffic to providing health care. 

The JG would set the minimum wage and a standard for working conditions. Private firms would be free to offer higher wages or better working conditions to hire the workers.

The JG would be countercyclical to and dampen the business cycle by expanding in down times and contracting in good times always maintaining full employment.

Perhaps most important, the JG would counter the corrosive sociological consequences of unemployment and inequality. Critics citing the costs of the JG should first consider the costs of these consequences. The costs and benefits of a JG have been researched thoroughly in the academic community.

Fundamental to the thinking behind a JG is the realization that our economy is not driven by production as viewed by advocates of trickle-down economics. Instead, the economy is driven by sales, which in turn, stimulate production. So, by providing work and wages the federal government stimulates demand to which production responds. 

It is time to make a choice. We can keep the system of enforced unemployment, with all its sociological consequences, to provide a pool of unemployed workers looking for work at low wages. Alternatively, through the JG we can establish a pool of employed workers willing to accept work at wages above a livable minimum.

Academics pushing the JG idea are Professors Darity and Hamilton at Duke University, Tcherneva at Bard College, Kelton at Stony Brook, Fullwiler at University of Missouri, Wray at Levy Institute, and others all of whom are looking at our economy in a refreshing and enlightened way.

Dan Metzger is a retired physicist, living in Chapel Hill, with an interest in how the economy works.  

President Trump gets Foreign Trade Wrong!

I rewrote the last article published in the Albuquerque Journal and submitted it to the Durham News & Observer. It didn't fly.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. And, so it is with foreign trade.

President Trump sees trade deficits, import expenses in excess of export income, as a bad deal and surpluses as a good one. Where we have trade deficits the frontal attack is the president’s tactic of choice. He plans to impose tariffs on some imports, which makes those goods more expensive. That’s not a win! Let’s take a closer look. There’s a better option.

When we import we increase our standard of living by purchasing something we want after considering price, quality, and availability. The president thinks we are not paying enough for some things. He wants us to pay more or do without those goods thus lowering our standard of living. 

This applies to the president’s most recent targets, lumber from Canada, cars from Germany, steel from Canada, Brazil, and North Korea; and aluminum from Canada and Russia. President Trump now invokes national security to rationalize tariffs to benefit workers in the metal industries. He could achieve his nominal objective by requiring the military to source its needs domestically while allowing the rest of us to buy at the lowest prices.

Other countries like to export to us so they can get US dollars, which are the widely favored foreign exchange currency. Exporters give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In real economic terms of trade, the winner is the importer, who gets real stuff for mere paper or computer digits. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of real trade, our trade deficits make us winners not losers. So, what is the down side of being a winner? When we spend into a foreign economy rather than our own the result is higher unemployment. 

The dilemma is this. We must reduce our standard of living by limiting imports to maintain employment or suffer increased unemployment to enjoy a higher living standard. 

The frontal attack favored by President Trump is to impose tariffs to the consternation of trading partners, who may counter with reprisals. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of employed workers that businesses could draw upon when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits while increasing tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption demand and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!

Trump ’n Trade - A better standard of living for all

I submitted this little piece to the Albuquerque Journal. My last submission before I cancel my subscription to that neoliberal rag. Actually Vera finds the New Mexican much more informative. This was published in the Albuquerque Journal North on June 9.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. So it is also with foreign trade.

President Trump sees trade deficits, more import expenses than export income, as bad and surpluses as good. So, where we have trade deficits the frontal attack is the president’s tactic of choice. He talks about taxing the imports to make them more expensive. Let’s take a closer look. There is a better option.

When we import we increase our standard of living by purchasing something we want, say lumber from Canada or cars from Germany, after considering price, quality and availability. The president thinks we are not paying enough for these things. He wants us to pay more or do without these goods thus lowering our standard of living. 

Other countries like to export to us so they can get US dollars, the widely favored foreign exchange currency. They give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In terms of real goods, the real economic terms of trade, the winner is the importer. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of trade our trade deficits make us winners not losers. So, what is the down side of being a winner. When we spend into a foreign economy rather than our own the result is higher unemployment. 

The conundrum is this. We must reduce our standard of living by reducing imports to maintain employment or suffer increased unemployment to enjoy a higher living standard.

The Current Account closely matches Trade Balance deficit. Also, current account closely matches the Capital Account, the measure of capital leaving US. We can afford it. See https://fred.stlouisfed.org/graph/?graph_id=192470&rn=7163

The frontal attack is to tax our trade deficit as proposed by Speaker of the House Paul Ryan and threatened by President Trump. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of workers that businesses could draw on when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits and add to tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!

Conservative economics yield poor results

I submitted this to the Albuquerque Journal on May 7, 2017. They didn’t publish it. Well, I’ll admit  it is a bit strident, so I’ll try to do better next time. But, these are strident times.

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The only thing more wacky than Robert Samuelson's column in the Journal on Saturday morning was its title, "Health entitlements consuming more GDP.” So called entitlements don't consume GDP, they add to and are a part of it. Samuelson complains that “entitlements” make up too much of GDP. 

A large fraction of health care costs make private investors rich, which means we have a health profit system and "care" takes a back seat. The fix would be more care and less profit.

Then we have Social Security, that the rich don’t need to care about. But, most old people care. When they buy things; food, clothing, smart phones, cars, they contribute to the economy. They consume, but they don't consume GDP.

As Samuelson observes, after we add in defense and other discretionary spending, Federal spending adds up to 15-20% of GDP. I think it should be more. For those, who think it is too much, we can do what any third grader can understand: Increase GDP! 

How do we increase GDP? We increase consumption, which typically makes up 75% of GDP. How do we increase consumption? We increase the income of workers by giving them a greater share of the benefits of our increasing productivity. It does not help GDP to give tax breaks to the rich. They don't spend more. They have no reason to invest in more production when customers have little money in their pockets. 

From Tcherneva 

real-world economics review, issue no. 71 

For almost a half century, we have followed the neoliberal, free market, trickle-down economic myth and have paid for it with a sluggish economy. Workers have not benefited from increased productivity. By now we should realize that the neoliberal paradigm exploits labor, the environment, legislatures, and ignores the arts and sciences to enrich the few at the expense of many.

Unfortunately, the neoliberal emphasis on nonproductive financial products has increased the  well known wealth gap. The financial sector acquires over 40% of corporate profits. This becomes overhead on everything we buy including productive labor. This overhead is the main reason our labor costs are not competitive. 

Samuelson concludes with the old neoliberal bugaboo over federal deficits. This is just a myth to convince us that federal spending must always be avoided in favor of privatizing public services to gain more profit. 

Federal spending increases demand for goods and services. Too much spending will cause inflation only if our productive capability falls short of demand. Meanwhile, deficits add to private savings, and the government can buy anything that is for sale in US dollars including labor.

So, government can be involved in increasing GDP. It can afford to hire staff for healthcare, teachers and facilities for a more capable work force, workers to build infrastructure, and to support senior citizens with a decent retirement. Our children and their children benefit from wise federal spending without having to pay off the national debt. They don’t owe it; they own it.

Samuelson and other neoliberals would have us believe it's all about money. It's not. It’s about allocation of our productive resources, which are people and facilities. We can afford anything we can do. It is not about living within our means; it’s about living up to our means.

Debt crisis, what debt crisis?

I submitted this to the ABQ Journal Oct 20, still no joy. An earlier version in response to the Anthony Davies’ OpEd on October 5 is now past its use-by date. In addition, I have included below links to verify attributions I made and one to John Harvey, who is one of many from academia whose views I share. 

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The federal debt has almost everyone in a panic. Most pundits and politicians including those from President Obama to Sara Palin and from The Peter Peterson Foundation to The Committee for a Responsible Federal Budget have agreed that the federal government should manage its debt just like a household. “Government must stop spending more than it earns.” This note disputes that job-killing, intuitive myth.

Since President Nixon took our country and the world off the gold standard in 1971, we have had a fiat monetary system. All our money comes from the US government. Bank loans or federal spending bring money into the economy. 

Under a gold standard the amount of gold held by the government limits the amount of money in the economy. Under a fiat system only our productive capacity, our workforce and facilities, limits us. This is completely contrary to old economic thinking. 

Limited only by our productive capacity, we can afford anything we can do. Because our economy can have all the money it needs, our politicians need not worry about funding but how to grow our productive capacity and where to deploy it for a prosperous future. 

Gross Domestic Product (GDP), which is the monetary value of all the goods and services sold in our country, measures our economy. The elements that contribute to GDP are household consumption, business investment in the means of production, net exports, and the government deficit. 

To grow GDP, we must have people employed in productive activities. In a poor, slow-growing economy household consumption is low, because people choose to pay off debt or otherwise save rather than buy stuff. Also, business investment is low, because inventory is not needed when people are not buying stuff. In our country, net exports are negative, because we have net imports. All this results in slow growth and too many people being either unemployed or under employed.

The only choice remaining for growth is government deficits to increase employment and add to GDP. 

Deficits are not under the complete control of government. They depend on household decisions about saving and business decisions about investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and continuing support for the poor and disabled. 

Deficits add to our economic growth and well being. Reduced deficits would make our economy worse. Deficits alone do not cause inflation until demand for goods and services exceeds our ability to produce them. Only when all able bodies are employed do we reach our limit of production.

Private debt is larger than Federal debt. Private debt is the problem; it has to be paid back to creditor.

Government austerity represents an outdated economic view. After eight years of sluggish economic performance using the old views that rely on monetary policies to stimulate growth, many economists are looking at fiscal measures, which means more deficits. Recently, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating fiscal stimulus as part of a “New View” to replace the “Old View.” 

Empirical evidence of the dangers of too-small deficits exists in the Eurozone where the Maastricht Treaty limits deficits to 3% of GDP. Only countries with strong exports such as Germany can comply readily with that constraint. Eurozone countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they suffer under a de facto gold standard. So grave is the Eurozone crisis that the eminent economist, Joseph Stiglitz, has advised both Greece and Portugal to exit the Eurozone, and he predicts that Italy may exit in a few years. These economies are decimated, because they have not been able to run enough deficits to prosper.

Fiscal deficits, used productively, will expand our economy. The resulting federal debt is not a crisis. We never have to pay it off; we outgrow it by keeping our GDP growing.

Recent Furman paper:

https://www.whitehouse.gov/sites/default/files/page/files/20161005_furman_suerf_fiscal_policy_cea.pdf

Stiglitz Greece and Portugal advice and prediction for Italy:

http://money.cnn.com/2015/07/03/news/economy/greece-crisis-stiglitz-krugman/

http://www.theportugalnews.com/news/economy-nobel-winner-says-portugal-should-exit-euro/39411

http://www.reuters.com/article/us-eu-euro-economist-idUSKCN1252GM

Prof. John Harvey:

http://www.forbes.com/sites/johntharvey/2016/10/19/one-more-reason-to-be-depressed-about-this-years-election/#15a41f353ae2

There is no federal debt crisis

I tried again to counter conventional wisdom with this submission to the Albuquerque Journal. It drives me nuts if I don't keep trying.

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In his article in the Journal on October 5, Anthony Davies claims we must cut federal spending to solve the debt crisis. There is no federal debt crisis. Our crisis for over eight years has been slow growth of the economy and too few good jobs. 

First, Davies writes that when interest rates rise to pre-recession levels, the federal government will owe an additional 500 billion dollars in interest. Actually, it would be more than that, but let’s not quibble.

More importantly, we must understand to whom the interest is paid. That would be the holders of all US Treasury securities, which comprise the federal debt: banks, pension funds, mutual funds, wealthy individuals, and foreign central banks. Also, higher interest rates mean more income to our bank accounts.

In short, federal interest payments are income to the private sector. Income to the foreign sector provides dollars to foreigners that can be spent in our economy. 

Second, and more consequential, Davies apparently thinks that government spending can manage the federal debt. Our federal debt is the accumulation of deficits since the beginning of the republic. Deficits are largely determined by choices made in the private sector.

Conventional wisdom is wrong. Our debt provides assets for the future.

Our economic output is measured by Gross Domestic Product (GDP), which is the monetary value of all the finished goods and services produced in our country. The elements that contribute to GDP are household consumption, business investment in the means of production, net exports, and the government deficit.

To grow GDP, we must have people employed in productive activities. In a poor slow-growing economy household consumption is low, because people would rather pay off debt or otherwise save rather than buy stuff. Also, business investment is low, because inventory is not needed when people are not buying stuff. In our country, net exports are negative, because we have net imports. All this results in too many people being either unemployed or under employed.

Consequently, the only choice is government deficits to increase employment and add growth to GDP. Those deficits depend on household decisions regarding consumption and business decisions regarding investment. Additionally, a poor economy increases the deficit through unemployment insurance for more people and increased support for the poor and disabled. 

Clearly deficits add to our economic growth and well being. To reduce federal spending would make our economy worse.

Davies’ position represents an outdated economic view. After eight years of sluggish economic performance using the old views that rely on monetary policies to stimulate growth, many economists are looking more favorably upon fiscal measures, which means more deficits. To that point, on October 5, Jason Furman, Chairman, Council of Economic Advisors, published a conference paper advocating a fiscal stimulus as part of a “New View” to replace the “Old View.”

Empirical evidence of the dangers of too-small deficits is found in the Eurozone where deficits are limited to 3% by the Maastricht Treaty. There, only countries with net exports such as Germany can comply readily with the treaty. These countries are compromised further by having given up their sovereign currencies to the Euro. Consequently, they can not “print” money to pay their debts. So grave is the Eurozone crisis that the eminent economist, Joseph Stiglitz, has advised both Greece and Portugal to exit the Eurozone, and he predicts that Italy may exit soon. These economies lie in ruin because they have not been able to run enough deficits in their own sovereign currencies to prosper.

Fiscal deficits, used well, will benefit our economy. The resulting national debt is not a crisis. We never have to pay it off; we outgrow it by keeping our GDP growing.

Next President must employ fiscal policies

Today, I submitted this to the Albuquerque Journal. I'm sure they won't publish it, because they highlighted the Macguineas article with a complementary Editor's note. Gotta keep trying.

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Unless we understand what our fiat money is and how it works in our economy, we will continue to think we must balance our national budget or suffer dire consequences just like a household. That leads to the confusion of the Journal editor, who praised a “policy expert,” Maya Macguineas, for her column on September 3rd as the answer to, “What should the next president’s plan be for the national debt?” Both the editor and Macguineas are misinformed.

This quote from another expert, Warren Mosler (Soft Currency Economics II, 2012), tells us almost all we need to know.

“The concept of fiat money can be illuminated by a simple model: Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won’t care a bit about accumulating their parent’s business cards, because the cards are virtually worthless. But, when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value, and chores begin to get done. 

“Value has been given to the cards by requiring them to be used to fulfill a tax obligation. 

“Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without continuous deflation. 

“The children will likely desire to earn a few more cards than they need for the immediate tax bill, so the parent can expect to run a deficit as a matter of course.”

That was then. Now credit is money, and gold is just another commodity.

The children may trade among themselves exchanging cards for services or real goods. However, they can not create cards. So, the net financial resources that children can save come from parental deficit spending. 

If there are not enough chores or the wages are too low, some children will not be able to pay their rent. Then we have involuntary unemployment and deflation. There is no need for unemployment as long as there is work to be done and workers available, the parents can always come up with more cards.

We could push the model further to include banking and trade with the neighbor’s children. In a fiat monetary system, the prosperity of the children is managed by the parents making sure that there is full, productive employment. To prevent inflation parents can increase taxes, which take cards away from the children. Then the deficit will take care of itself.

The deficit hawks cite scary consequences due to high private savings, but those consequences just don’t happen. 

Deficits drive interest rates down not up, because federal spending puts money into private bank accounts, which in turn increases reserves in the banking system. Then to maintain interest rates, government has to pay interest on bank reserves and/or sell Treasury securities to reduce the reserves. 

Interest on treasuries, which constitute the “debt,” stimulates the economy as it is income to the private sector not a cost.

We can always have enough cards for entitlement programs as long as we invest in the facilities and personnel necessary to staff them. 

Our economy is not about having or not having cards, it is about allocating our productive resources. We can not afford to continue to let those resources go to waste; we always have enough cards to employ resources productively. Then GDP and private savings will grow appropriately, and the deficit hawks can find something better to do.

The next President and Congress must employ fiscal policies to invest in the education, employment, and well being of the people. And, if they must, war. Our nation can achieve shared prosperity.